More than 27 million workers got a boost in their take-home pay yesterday – thanks to a 2p cut in National Insurance.
The amount workers pay on their earnings between £12,571 and £50,270 was reduced from 12 to 10 per cent. Announcing the cut during his Autumn Statement last year, Chancellor Jeremy Hunt said it would be worth £450 a year to a worker earning the average £35,400 wage.
Two million self-employed workers will also receive a cut in their NI contributions, effective from April.
However, while most workers will be relieved to see their tax bill fall, some could find a huge financial benefit from using these gains to voluntarily make extra National Insurance payments.
That is because your National Insurance record determines what size of state pension you receive when you hit retirement age. If you have gaps in your record, a special window is open that lets you pay extra National Insurance top-ups to buy up to ten extra years of state pension contributions.
Future-proof: Taxpayers have until April 2025 to make the top-ups, after which it will no longer be possible to make these historical additional payments
The cost of making voluntary NI contributions was not included in the Chancellor’s tax cuts as they are paid in a different way.
Taxpayers have until April 2025 to make the top-ups, after which it will no longer be possible to make these historical additional payments. And many have already taken advantage of the concession to boost their state pension. Official figures from HM Revenue & Customs published last month showed an 85 per cent surge in the voluntary contributions that were made in the year to March 2023. Total payments rose to £392 million, up from £212 million the year before.
Experts say it is a compelling proposition, enabling someone to spend up to £8,000 to net a £77,400 increase in their income over a 20-year retirement. In the most extreme example, if you bought 16 years of top-ups in one go — you could boost your state pension income by £123,841 over the next 20 years, according to stockbroker Interactive Investor.
Steve Webb, a former Pensions Minister and now partner at consultancy LCP, says that if you can afford to set aside any savings you make from last week’s NI cut and use it to top up your state pension, it could be the best investment you can make.
‘It is incredibly generous,’ he says. ‘The vast majority of people who do this will be quids in after four years and thousands of pounds in profit during retirement.’ The state pension is currently paid from age 66 and the amount you will receive depends primarily on how many years you worked, how much you earned and whether you were employed or self-employed.
There are two types of state pension: the ‘basic’ pension is paid to people who reached state pension age before April 6, 2016 and the ‘new flat rate’ pension is paid to those after that date.
Anyone on the ‘basic’ state pension needed 30 years of NI contributions to qualify for £156.20 a week. Those on the ‘new’ state pension need 35 years of NI contributions to get the full ‘flat rate’ amount – £203.85 a week.
Any shortfall on your NI record will result in a smaller pension when you reach retirement age. You can pay to fill any of these gaps and this will increase the amount you will receive.
You do this by ‘buying’ missing NI contributions at a flat rate. This is unlike the NI contributions employed workers make each month – known as Class 1 contributions – which are paid as a percentage of your income.
It costs £15.85 to buy one week’s worth, or £824.20 for a year’s worth between 2006 and 2016.
Currently, £824.20 boosts your state pension by £303 a year. That’s worth at least £6,060 over a 20-year retirement. This is the rate for Class 3 contributions, the most common type paid by workers. This rate will be frozen next tax year and will not rise by inflation. Those who are self-employed usually pay the Class 2 NI rate. Buying a year’s worth costs just £163.80, but generates the same boost in the state pension.
There are several reasons why you may be missing some years worth of NI contributions. For example, you may have been employed part time, earned less than the threshold for NI payments to be made or taken time out of work to look after children or elderly relatives.
If you suspect you have gaps, you should first check your record. Go to gov.uk/check-national-insurance-record.
Next, you should check your state pension forecast by contacting the Future Pension Centre on 0800 731 0175 if you are below age 66, or the Pension Service for those above pension age on 0800 731 7898. These Government services can tell you which years you are eligible to make extra contributions for and if you will benefit.
You can also access your forecast online at gov.uk/check-state-pension.
